TFSA vs. RRSP: How to Choose
Tax-free savings accounts (TFSAs) and registered retirement savings plans (RRSPs) are both registered accounts that you can use to save money and get tax advantages.
Generally, you can use both RRSPs and TFSAs to save for your future; you don’t need to choose between them.
However, each registered account has different rules about contributions, withdrawals and taxes. It’s important to understand which account will help you most effectively reach your savings goals, especially if you have limited funds.
How a TFSA works
A TFSA can be used to save for anything you want. You can withdraw your funds anytime, and there’s no requirement to replace them.
TFSA contributions are not tax-deductible. You won't pay taxes on the interest or investment income earned within it. TFSA withdrawals are tax-free.
How an RRSP works
An RRSP is a tax-deferred account specifically designed for your retirement.
RRSP contributions are tax-deductible. You won’t pay taxes on any investment earnings or interest earned while the funds stay within your RRSP. You will pay income tax on the amounts you withdraw in retirement.
One key benefit of RRSPs is that some employers offer RRSP matching programs, where the employer also contributes to your account. This additional “free money” can further maximize your benefits by leading to larger compounding returns.
TFSA vs. RRSP similarities and differences
Knowing how TFSAs and RRSPs compare to one another can help you understand how you can benefit from them.
Uses
You can choose to withdraw money at any time from a TFSA for any reason, such as purchases, travel or emergencies. There’s no requirement or timeline to replace the funds. You can also invest in a TFSA each year and leave your savings alone to earn compound interest tax-free to help fund your retirement.
RRSPs are designed for retirement savings. Two exceptions are the Home Buyers’ Plan and Lifelong Learning Plan, which you can use to pay for your first home or education expenses. However, both programs require you to repay the money within a specified time frame.
Eligibility
To open a TFSA, you need to be at least 18 years old and have a Social Insurance Number (SIN).
To start an RRSP, you must be less than 71 years old, be a Canadian resident, earn an income and file a tax return.
Contribution limits
Both TFSAs and RRSPs have contribution limits, or a maximum amount you can contribute each year. If you contribute more than these limits, you’ll face penalties and fees.
For a TFSA, there is a set annual contribution limit — in 2025, it’s $7,000. That amount is added to any unused contribution room you have from previous years. Your contribution room starts accumulating when you turn 18 or in 2009, whichever is more recent — even if you haven’t opened a TFSA yet.
The RRSP contribution limit is 18% of your earned income from the previous year, up to a maximum set by the CRA each year, plus any unused contributions from past years. For the 2025 tax year, the RRSP contribution limit is $32,490.
Contributing the maximum amount allowed each year is known as “maxing out.” If you're unable to max out your contributions for either of these accounts in a particular year, that’s OK. In both cases, the contribution room carries forward to the following years.
Withdrawals
When you withdraw from your TFSA, you get that contribution room back the following year.
However, once you withdraw funds from your RRSP, you lose that contribution room and the potential for compound growth that comes with it. Plus, you’ll have to pay a withholding tax on the amount withdrawn. This is one reason why it’s best to leave money in your RRSP until retirement.
The exception is withdrawals under the Home Buyers’ Plan and Lifelong Learning Plan, which are not subject to the withholding tax. Because you repay the amount you withdraw, these plans are more like a loan to yourself than a true withdrawal.
Taxes
Both types of accounts shelter interest and investment income from tax.
TFSA contributions are not tax-deductible, but withdrawals from a TFSA are tax-free.
RRSP contributions are tax-deductible, but RRSP withdrawals are taxable. They are taxed at your annual marginal tax rate. Plus you’ll pay a withholding tax for any lump sum withdrawal from your RRSP.
Time limits
TFSAs have no time limits; you can use them as long as you like.
For RRSPs, you can contribute until December 31 of the year in which you turn 71. After this point, you must transfer the funds to a registered retirement income fund (RRIF) or an annuity. YOu can also withdraw the entire amount in a lump sum, but that may result in a hefty withholding tax.
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How do I choose between a TFSA vs. RRSP?
Choosing between a TFSA and an RRSP depends on your financial goals and situation. You might also consider opening both types of accounts to save for multiple goals at once. Before making a decision, consider factors such as:
Timeline of your goals. When you’re saving for something short-term, such as a dream vacation, a home or an emergency fund, a TFSA may be a better fit. It allows you the flexibility to withdraw funds as needed and get that contribution room back the following year.
Your investment strategy. If you have a long-term plan to save for retirement, then an RRSP’s benefits might make it a smart choice. However, a TFSA can also be used as a retirement savings vehicle. You may choose one or both account options based on your specific goals, income and lifestyle. You can hold cash and investments like stocks, bonds and guaranteed investment certificates (GICs) in both types of accounts.
Tax benefits. People who earn a high income now and expect to have less income during retirement can benefit from the tax deferral provided by an RRSP, since they will likely be in a lower tax bracket when they withdraw the money. A TFSA doesn’t offer immediate tax benefits, but its growth is tax-free, so it may be a good option for people who expect to increase their earning power over time.
Current financial situation. If your income is unpredictable or you prefer to keep more of your savings accessible, a TFSA might be a better idea.
If you aren’t sure whether a TFSA or RRSP is right for your needs, it might be worth considering other RSP options or consulting a professional financial advisor.
Frequently asked questions
Can I contribute to both an RRSP and a TFSA?
Can I contribute to both an RRSP and a TFSA?
Yes. You can and probably should have both types of registered accounts. You should decide how much to contribute to each one based on your income, lifestyle and financial situation. Make sure you stay within the contribution limits for your RRSP and TFSA each year.
Can I have multiple RRSP and TFSA accounts?
Can I have multiple RRSP and TFSA accounts?
Yes. You can have multiple accounts at either the same or multiple financial institutions. Too many accounts may make it challenging to keep track of your finances and to make sure you stay within your RRSP and TFSA contribution limits.
Remember that you can’t contribute the maximum annual amount to each TFSA account. Your contribution limit is the total amount you can contribute to all TFSA accounts, whether you have one TFSA or several. The same goes for RRSPs.
Is it better to invest in a TFSA or an RRSP?
Is it better to invest in a TFSA or an RRSP?
Your decision to invest in a TFSA or an RRSP depends on your goals, income, timing and other factors. Many financial experts recommend saving for retirement in an RRSP if you’re in a higher tax bracket and want to take advantage of the tax deduction. If your employer matches RRSP contributions, that’s another great reason to choose to invest in an RRSP.
However, investing in a TFSA may be a better option if you want easier access to your funds, since you can withdraw from a TFSA at any time without paying a penalty.
For many people, it can be a good idea to contribute to both a TFSA and an RRSP.
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Siddhi Bagwe
Janine DeVault
Siddhi Bagwe